A perfect storm is forming which may batter your 2018 fulfillment strategy. First, late in 2017 lead times for purchasing capital equipment lengthened. Second, the new tax law accelerates depreciation of equipment and buildings creating more demand for capital products. Finally, vacancy rates for existing warehouses are down, driving prices up.
Here is more detail on each trend:
Longer Lead Time for Capital Products
In the final months of 2017, as the economy continued to improve, we saw lead times on capital equipment such as racking and automation increase significantly. Here are some examples:
- Warehouse projects requiring large quantities of racking are on 10-12-week lead times, once the design is agreed upon. The used market is virtually non-existent. For a smaller project we could find only enough racking to support a 25,000-square-foot facility
- Power conveyor and sortation equipment are on 12-18-week lead times from approved design
- Some newer lines of forklifts from major manufacturers have 24-28-week lead times
- In ordering 60 bays of basic steel shelving, four major manufacturers we dealt with all had 4-6-weeks lead times
Rewriting of Federal Tax Code
This blog should not be construed as accounting, legal or tax advice. Because the law has yet to be codified or written in IRS published guidelines, accounting and tax professionals are unsure of how the law’s principles will translate into details. Seek the guidance of accounting and tax professionals in order to understand the details as they emerge.
There are provisions for property and capital investments that will be able to be written off on an accelerated basis. This includes investments made in late 2017 as well as investments in 2018 through 2022. They apply to both new and used equipment and may vary depending on the type of expenditure made.
Combined with a good economy, the accelerated depreciation will create more demand for capital products and warehouse space.
Scarcity of Available Warehouse Space
According to CBRE Group, U.S. industrial availability registered 7.7% in the third quarter, down from 7.8% in the second quarter and from 7.9% a year earlier. The decline was the market’s 28th of the past 29 quarters.
We’re hearing anecdotally about more developers and companies developing warehouse properties. However, as the economy improves, the unknown is how much more warehouse space ecommerce businesses will require. “The supply pipeline is increasing, but vacancy isn’t expected to rise dramatically, and the market remains fundamentally balanced,” CBRE noted in its report.
Action Points to Take
Based on the above, here are our 5 recommendations for your fulfillment strategy in 2018:
Can you get more capacity out of your existing space? Before deciding to add warehouse space, can you get more from your existing space. In our warehouse assessments, we often find that we can increase product storage capacity by 10% to 20% – many times that buys additional time required to execute a warehouse move.
Manage project expectations: With manufacturer’s representatives understand what the lead times are if you are buying equipment and how they are changing. That doesn’t mean we need to sign speculative orders, etc. Then ensure the entire management team has realistic expectations.
Determine the impact of new tax law on your 2018/2019 strategy: Work with accounting and tax professionals to understand how the new law benefits your fulfillment strategy and profitability.
Determine fulfillment solution design as early as you can: In order to place equipment orders which are accurate you need to do the layout and design for changes in warehouse layout and design, automation and conveyor, shipping systems, etc. as early as possible.
Is additional warehouse space needed? If this is the year for building out your distribution network, you need to determine early whether acceptable space is available where you want to locate. The lack of available space may push new warehouses into a 24-30-month cycle for build to suit.
Another strategic option is use of a third-party logistics (3PL) provider on a temporary or permanent basis. This strategy can generally be executed quicker than a new warehouse and at a favorable cost.
Be proactive and do advanced planning to head off the negatives outlined above. If you take a wait-and-see approach you may not be able to implement your fulfillment strategy in the timeframe management expects.
Brian Barry is president of F. Curtis Barry & Company